VW starts labor talks on what to cut amid emissions scandal

FRANKFURT (Bloomberg) -- Volkswagen Group agreed to hold talks with labor leaders over priorities for investments and cost savings as the automaker grapples with the mounting cost of the emissions scandal.

The company's top executives will start 10 days of talks with powerful worker representatives led by Bernd Osterloh, a member of the supervisory board.

The board met Monday at Volkswagen’s headquarters in Wolfsburg, Germany, to discuss cutbacks and the emissions investigation, which gained new urgency last week after the carmaker disclosed carbon-dioxide emissions irregularities on top of its cheating on pollution in 11 million diesel vehicles.

VW's new management is grappling to maintain fragile relationships with Osterloh and other labor leaders as deep cutbacks loom.

"In the current, difficult situation, we need to make decisions that take into account profitability as well as employment," CEO Matthias Mueller said in a statement on Monday. "The new framework makes the task challenging."

Osterloh backed Mueller as a "reliable partner" in the same statement but added: "The workforce stands behind the company as long as we succeed in agreeing on a plan balanced between investment, savings and future-oriented projects."

Mueller has promised to freeze non-essential investments and look for cuts in the company’s portfolio of 12 brands and more than 300 different vehicles. The board is due to approve spending plans on plants, equipment and technology for the coming years at a meeting on Nov. 20.

Diess under fire

Osterloh had said last Friday that an announcement by VW brand chief Herbert Diess last month on cutting 1 billion euros ($1.08 billion) of spending per year at the division had broken German rules on co-determination by executives and labor, and demanded immediate talks with company bosses.

Labor leaders are irritated by Diess, who has also ordered a freeze on managerial promotions at the VW brand in a move that limits the clout of the works council, one source close to the board said.

VW has set aside 6.7 billion euros for product repairs arising from cheat diesel software, which it booked in the third quarter. The company has said it is not making provision for fines and litigation because it has no visibility on those costs. Analysts said the final bill could be 35 billion euros or more.

Underscoring the urgent need for action, Fitch Ratings on Monday downgraded the carmaker’s credit rating to BBB+ from A, saying the cut reflects "corporate governance, management and internal control issues."

Ratings downgrades

Fitch’s new rating puts Volkswagen at the third-lowest investment-grade scale and follows similar revisions by Moody’s Investors Service and Standard & Poor's in the wake of the emissions scandal.

"The latest findings unveiled by the company’s ongoing internal investigation are increasing the damage to Volkswagen’s image and reputation," Fitch said in a statement.

VW has said the CO2 irregularities disclosed last week will add about 2 billion euros in financial risk to the 6.7 billion euros it already set aside.

VW will need to perform significant engine repairs on 540,000 cars in Germany in a recall planned to start by early next year, according to the Federal Motor Transport Authority.

In the U.S., the company said it would give owners of rigged diesel cars $1,000 split between a prepaid Visa card and dealership credits.